Virtual Currency, Tangible Return: Portfolio Diversification with Bitcoin
Journal of Asset Management, 16, 6, 365-373, doi:10.1057/jam.2015.5
17 Pages Posted: 14 Sep 2013 Last revised: 23 May 2017
Date Written: 2015
Bitcoin is a major virtual currency. Using weekly data over the 2010-2013 period, we analyze a Bitcoin investment from the standpoint of a U.S. investor with a diversified portfolio including both traditional assets (worldwide stocks, bonds, hard currencies) and alternative investments (commodities, hedge funds, real estate). Over the period under consideration, Bitcoin investment had highly distinctive features, including exceptionally high average return and volatility. Its correlation with other assets was remarkably low. Spanning tests confirm that Bitcoin investment offers significant diversification benefits. We show that the inclusion of even a small proportion of Bitcoins may dramatically improve the risk-return trade-off of well-diversified portfolios. Results should however be taken with caution as the data may reflect early-stage behavior which may not last in the medium or long run.
Keywords: Bitcoin, risk, return, diversification, virtual currency
JEL Classification: G11, G15, O16, F39, G01, E44
Suggested Citation: Suggested Citation